Incomes and spending increase in December

Posted Feb. 1, 2010 at 7:59 a.m.

Associated Press | Personal incomes rose more than expected in December and consumer spending increased for the third straight month, helping the economy slowly recover from the worst recession in decades.

Still, the increases were modest, reflecting the reluctance of many households to spend amid tight credit and high unemployment. Widespread joblessness is also limiting wage and salary growth, as firms find it easier to retain workers without raising compensation.

“Consumers continue to save far more than in recent years and allocate
their spending very carefully,” Julia Coronado, an economist at BNP
Paribas, wrote in a note to clients.

The Commerce Department said Monday that incomes rose by 0.4 percent,
the sixth increase in a row. That’s slightly better than analysts’
expectations of 0.3 percent growth.

Income growth was spurred by a large, one-time social security payment,
the department said. Wages and salaries rose by only 0.1 percent, or
$9.1 billion, after increasing 0.4 percent, or $27 billion, in November.

Consumer spending, meanwhile, increased by 0.2 percent, less than
analysts’ forecasts of 0.3 percent. The department also revised
November’s figure to show a 0.7 percent increase in spending, higher
than the initial estimate of 0.5 percent.

Consumer spending is closely watched because it accounts for about 70
percent of total economic activity. Spending has grown in the past six
months but consumers remain cautious as they seek to rebuild savings
battered by a steep decline in household wealth.

Americans saved 4.8 percent of their incomes in December, the
department said, up from 4.5 percent the previous month. That’s up
sharply from the spring of 2008, when the savings rate fell below 1

Rising spending helped the economy grow at a rapid pace in last year’s
fourth quarter, the department said last week. Consumer spending
increased by 2 percent in the October to December period, after a 2.8
percent increase in the third quarter.

That helped boost the nation’s gross domestic product, the broadest
measure of the economy’s output, by 5.7 percent in the fourth quarter,
the department said. It was the fastest growth in six years. The
economy grew at a 2.2 percent rate in the third quarter after a record
four straight quarters of decline.

Much of the growth was powered by increased production as companies
stabilized their inventory stockpiles. Inventories were cut sharply in
the recession as sales slowed. As firms rebuild their inventories, the
economy should benefit. But once inventories are in line with sales,
that support for the economy will disappear.

Many economists are concerned growth will likely sputter to a 3 percent
pace or below in the current quarter once government stimulus and
inventory restocking fades. Many economists expect the economy to grow
at about a 2 percent pace this year.

That likely won’t be fast enough to reduce the unemployment rate, which
currently stands at 10 percent. Unemployment will likely rise for
several more months, most economists say, and remain near 10 percent
through the end of the year.

A price gauge tied to consumer spending edged up 0.1 percent in
December, below the 0.3 percent pace in November. Excluding volatile
food and energy costs, it ticked up 0.1 percent.

Over the past year, this price gauge excluding food and energy is up
only 1.5 percent, a sign that inflation remains in check. That makes it
easier for the Federal Reserve to keep a key interest rate at a record
low of nearly zero percent, in an effort to stimulate the economy.


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